California Court Underscores Unenforceability of Contractual Non-Solicitation Clauses
Topics: Court Decisions
Following the lead of the California Supreme Court’s recent decision in Edwards v. Arthur Andersen, a California Court of Appeal reiterated this week that contracts prohibiting former employees from soliciting customers are not enforceable, unless tied to protecting the employer’s trade secrets. In The Retirement Group v. Galante, the trial court granted an injunction barring some former employees from directly or indirectly soliciting the employer’s customers to do business with a competitor. The appellate court reversed the injunction, holding that the injunction against solicitation was improper under California law. Although the employees at issue had each signed contracts with their employer agreeing that they would not solicit the employer’s customers following termination of employment, the court held that such non-solicitation provisions are not enforceable in California because they are prohibited by Business and Professions Code section 16600’s broad restriction on non-compete agreements. The court made clear that employers can validly prohibit employees from using the employer’s trade secrets post-employment, but emphasized that general non-solicitation restrictions are not enforceable unless directly tied to the use of protected trade secrets. In this case, the former employees solicited customers whose contact information was available not just through the employer’s database, but also through independent third party databases. As such, the court held that the employer had not successfully established that the solicitation at issue was tied to the use of protected trade secret information.
The Retirement Group case is another reminder of California’s strict stance against non-compete agreements in the employment context. Unlike many states, which allow non-compete agreements if narrowly tailored and reasonable, California broadly prohibits restrictions on an employee’s ability to lawfully compete post-employment. With the exception of limited allowance of such agreements in the sale of business or dissolution of partnership contexts, these agreements generally will not be enforced in the employment context. Employers generally are limited to preventing employees from using protected trade secret information. Whether information constitutes a protected trade secret under California law is a fact-specific inquiry that involves consideration of the value of the information, the extent to which the information is generally known or available to competitors, and the employer’s efforts to keep the information a secret.
Although non-compete agreements are allowed in only narrow circumstances in California, employers with sensitive business information are still wise to utilize confidentiality and non-disclosure agreements, for the purpose of demonstrating to employees the types of information the employer considers confidential and the importance the employer places on retaining the secrecy of such information. Employers who require California employees to sign “non-compete” type agreements as a condition of employment are urged to have such agreements reviewed by counselbecause requiring employees to sign overbroad and unlawful agreements can support a potential lawsuit by the employee for wrongful termination in violation of public policy and/or interference with prospective business advantage.